Wednesday, January 31, 2007

TD Bank Plans No Dividend Payout Ratio Hike

Financial Post, Duncan Mavin, 31 January 2007

Investors in Toronto-Dominion Bank will not be paid a bigger share of the bank's earnings until there is a downturn in the financial-services industry, said TD's chief executive yesterday.

TD reported record earnings in 2006 of $4.6-billion, up from $2.2-billion the previous year.

But the bank did not touch its 40% target dividend payout ratio -- the proportion of earnings it pays out to shareholders.

There will be no change in that dividend policy until an economic slowdown puts the brakes on earnings growth, said TD chief execiutive Ed Clark, who was speaking to the Citigroup Financial Services Conference in New York.

TD has one of the lowest dividend payout ratios of all of Canada's banks. Royal Bank of Canada and Canadian Imperial Bank of Commerce have dividend payout ratio targets of 40% to 50%. Bank of Montreal increased its target payout ratio to 45% to 55% in May.

But Mr. Clark said there is no need to raise the targeted payout ratio to give more to shareholders when earnings are increasing. If profits rise then investors will get more back in the form of dividends even if the ratio of dividends to earnings stays the same.

Raising the dividend target during periods of rising earnings is "like having a nice meal but you're hungry the next d ay," Mr. Clark said.

Instead, it makes more sense to raise the payout ratio when earnings are falling, because that is the only way to maintain the actual amount of dividend paid out.

There was some speculation on Bay Street that BMO's decision to hike its dividend payout ratio last year would be followed by the other banks. But that has not been the case.

"I'm not that surprised that we haven't seen a more dramatic shift in dividend policies in the sector," said Jason Bilodeau, an analyst at UBS Investment Research.

"You have to balance near-term dividend policy against the medium- term outlook for sustainable earnings, reinvestment opportunities, share buybacks and acquisitions. I think you'll continue to see a pretty gradual climb in payouts across the group"

TD's Mr. Clark said his bank will return earnings to shareholders through share buybacks, and will also invest excess capital in its U.S.-based retail-banking subsidiary, TD Banknorth.

TD has made an offer to buy the 43% of Portland, Me.-based TD Banknorth it does not own. The Canadian bank is hopeful Banknorth's shareholders will vote in favour of its takeover offer this month.

Mr. Clark also confirmed that there will be no acquisitions in 2007 at Banknorth, which operates across the U.S. Northeast. However, the TD chief said there could be small acquisitions of between US$2-billion and US$3- billion at Banknorth starting in 2008.